HMRC Consultation on Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs)

The UK Government has launched an open consultation on the taxation of Employee Ownership Trusts ("EOT") and Employee Benefit Trusts ("EBT").

On 18 July 2023 the UK Government launched a new open consultation to the employee ownership sector regarding the treatment of EOTs and EBT under the current taxation regime. 

At the moment EOTs and EBTs can benefit from favourable taxation positions and obtain certain tax reliefs.  HMRC are looking at some potential targeted reforms to ensure that EOTs and EBTs are being used properly, and for the benefit of the employees of the companies involved, so as to further the policy objectives which sit behind the creation of EOT and EBT companies which is to encourage employee engagement.  Situations where the EOT or EBT regime have been entered into purely for the favourable tax treatment are not viewed as encouraging this employee engagement and this appears to have prompted the consultation. 

In particular the consultation is aiming to field responses on 12 core questions: 

1. Do you have any comments on the proposal to prohibit former owners and connected persons from retaining control of an EOT-owned company post-sale by appointing themselves in control of the EOT trustee board?

2. Should the government go further and require that the EOT trustee board includes persons drawn from specific groups, such as employees or independent persons? If so, how should these groups be defined?

3. Do you have any comments on the proposal to require that the trustees of an EOT are UK resident as a single body of persons?

4. Do you have any comments on the proposal to confirm in legislation the distributions treatment for contributions made by a company to an EOT to repay the former owners for their shares?

5. Do you have any comments on the proposal that HMRC stops giving clearances on the application of section 464A of the Corporation Tax Act 2010 to the establishment of EOTs?

6. Should the EOT bonus rules be eased so that tax-free bonuses can be awarded to employees without directors necessarily also having to be included, and would this undermine protections which ensure that bonus payments are not abused or weighted towards some employees?

7. Do the EOT bonus rules create any other unintended consequences or challenges in administering the tax-free bonus payments?

8. In addition to the reforms proposed at Chapters 4 to 6, do you have any views on ways the Employee Ownership Trust tax regimes could be reformed to better support employee ownership?

9. Do you have comments on the proposal to confirm the government’s position by making it explicit in legislation that the restrictions on connected persons benefiting from EBT must apply for the lifetime of the trust?

10. Do you have any comments on the proposal to only allow the IHT exemption where the shares have been held for two years prior to settlement into an EBT?

11. Do you have any comments on the proposal that no more than 25% of employees who are able to receive income payments should be connected to the participator in order for the EBT to benefit from favourable tax treatment?

12. In addition to the reforms proposed at Chapter 7, do you have any views on ways the tax treatment of EBTs could be enhanced? 

Wrigleys are looking forward to taking part in the consultation ourselves, and assisting in informing HMRC's reforms to ensure they continue to put employee engagement at the heart of the EO sector. 

The Employee Ownership Association is gathering input from the EO sector and shall be engaging with the consultation.  Further detail can be found here. 

If you wish to be part of the consultation, or to read up on what HMRC are currently proposing, you will find the full text of the consultation here.